Case Study – Amgen Inc. v. Connecticut. Retirement Plans and Trust Funds
Securities fraud allegations are all too common for large enterprises. And in the resulting litigation, the moment of class certification is often a critical one. Once a class is certified, any potential damage recovery can increase by several orders of magnitude. For that reason, some securities fraud defendants will try anything to defeat it.
Such was the case in Amgen Inc. v. Conn. Ret. Plans and Trust Funds (Amgen)133 S. Ct. 1184 (2013).
Amgen involved a securities fraud action under SEC rule 10b-5. Generally, in such actions, a plaintiff must prove reliance on a “material” misrepresentation or omission made by the defendant in order to succeed. Proving direct reliance, however, is unnecessary when plaintiffs resort to the fraud-on-the-market theory, which states that statements made to the public are presumptively relied upon due to the efficient functioning of the securities market. That is, statements of companies and their agents are heavily scrutinized and analyzed by a number of institutions and investors, and this information is generally reflected in stock prices.
In the underlying action in Amgen, the plaintiff, Connecticut Retirement Plans and Trust Funds (CRPTF), alleged that a fraud had been perpetrated on the market, and sought certification of a class under Federal Rule of Civil Procedure 23. The District Court certified the class, and defendant Amgen appealed the certification on the basis that the plaintiff should have been required to prove materiality in order to satisfy Rule 23’s requirement that “questions of law or fact common to class members predominate over any questions affecting only individual members.”
On appeal, the 9th Circuit rejected this argument and affirmed the District Court’s decision. Not satisfied, Amgen appealed the case to the Supreme Court, who granted certiorari in order to resolve a split of authority in which certain courts had made rulings in harmony with Amgen’s arguments.
Essentially, the court felt that Amgen’s approach was, “[Putting] the cart before the horse.”133 S. Ct. 1191. The purpose of Rule 23(b)(3) is not to, “adjudicate the case; rather, it is to select the ‘method’ best suited to adjudication of the controversy ‘fairly and efficiently.’” Id. Amgen’s argument would require that plaintiffs delve too deeply into the merits of their claim simply to determine whether a number of plaintiffs could pursue a consolidated class action.
Focusing on the language of Rule 23 itself, the Court considered the extent to which proof of materiality was needed to ensure that common questions would predominate over individual ones, but could find little relevance of such proof to that issue. The Court observed that materiality is proven through evidence common to the class, leaving no risk that individual questions will somehow come to predominate. If materiality cannot be established then the effect is to terminate the action, not to lead to the predominance of individual questions.
Therefore, no matter what happens with respect to materiality when the case reaches the stage of evaluating the merits of the plaintiffs’ claims, it will not have the effect of rendering a Rule 23 class certification improper. In short, the two issues have little to do with each other. For that reason, the Court affirmed the decision of the 9th Circuit, and held that a materiality analysis should not be conducted at the class certification stage of litigation, and moreover, is not a requirement for class certification.